Lockheed Martin speeds work, sets prices early — and wins contracts

Lockheed Martin Space Systems Co. (LMSS) landed $2.1 billion in satellite construction work for the U.S. Air Force in the past four months, in part by giving the military a rare commodity in government contracting — certainty.

The Jefferson County-based space division of Lockheed Martin Corp. clinched deals since October for work on six satellites providing communications, rocket launch monitoring and positioning data to the Air Force.

The deals are part of $2.7 billion of Air Force satellite fleet building that LMSS started in the past year, a time when looming budget cuts and congressional inaction threw a cloud of uncertainty over spending.

LMSS clinched the work by accelerating the design pace and getting more quickly to the predictable construction phase, and by cutting satellite supply expenses and going earlier to fixed-price contracts that put LMSS on the hook for more of any future overruns.

The approach requires a lot more back and forth with the Air Force in the design phase of a satellite project, figuring out the most cost-effective way to build a satellite that meets the Air Force’s needs.

“Before, it was, ‘Want it to do this and that? Have this kind of power? OK. You want it painted red? We’ll do that,” said Mark Valerio, vice president and general manager of military space programs at LMSS. “What we’re doing now, we’re looking at reducing cost. We’ll go back to the customer and say, we can use this kind of equipment and save you money.”

Valerio oversees a 3,000-employee workforce dedicated to military satellite projects, most of them at LMSS’ headquarters in the foothills southwest of Denver and its campuses in Newtown, Pa., and Sunnyvale, Calif. They’re part of the overall LMSS workforce of 14,000.

The Air Force in December awarded LMSS a $1.94 billion contract to build the fifth and sixth satellites for the military’s Advanced Extremely High Frequency (AEHF) communications satellite fleet. Counting an earlier supply contract, the deal’s value is an estimated $2.4 billion.

On Oct. 25, the Air Force awarded LMSS $82 million to start work on a pair of Space-based Infrared System satellites, the fifth and sixth in the missile-detection fleet.

On Feb. 8, LMSS got $62 million to start building on the fifth and sixth GPS III satellites for the Global Positioning System constellation of 32 satellites. That fixed contract comes a year after the $263 million deal starting the third and fourth GPS III satellites.

All of Lockheed Martin did well in 2012, landing a record $49 billion in new contracts and awards in the United States and abroad, CEO Marillyn Hewson said in a Jan. 24 conference call. She cited the F-35 Joint Strike Fighter airplane program and the AEHF satellite contracts as among the most notable achievements.

LMSS can make projects more predictable, in part because of where the U.S. Air Force satellite fleets are in their development, Valerio said. They’ve been planned for years, and the design engineering is largely finished.

The Air Force also is under pressure to get contracts finalized to prevent exposing projects to looming federal budget cuts, said Loren Thompson, a defense industry consultant who’s worked with Lockheed Martin and other major contractors.

“The contract officers know the money must be obligated by a certain time to avoid sequestration, so they had an incentive to get things done,” Thompson said. “If they can get the money obligated, they avoid losing it.”

Knowing that shrinking federal budgets would make it unlikely the military would order new fleets of satellites, LMSS started reorganizing in 2009 at the direction of chief Joanne Maguire, who retires next month. The company overhauled its management structure, and made its work flow leaner and more flexible. Production processes share people among projects, and use space and personnel more efficiently.

Organizing LMSS’ workforce by function replaced a structure in which employees and many managers were dedicated to particular projects.

Some workers stay dedicated to specific projects, but most might be called on to help with engineering on a military satellite and later help develop something for a NASA project.

Lockheed Martin now also designs different satellite fleets to have as much standardized hardware as possible so parts can be purchased for use by different programs.

Military satellites used to be more tailored for each project, Valerio said.

The new organization, and its predictability, lets LMSS offer to convert satellite fleets into fixed-priced contracts after building just a satellite or two.

And because LMSS has been landing work for adding satellites to fleets while earlier ones are still in construction, it can order material from suppliers in greater quantity.

“The fact there’s still an overlap between [satellites] one and two, that keeps supply chain going,” Valerio said, which drives down costs. “It’s just like going to Costco and buying a big box of cereal. It’s a lot cheaper per Cheerio.”

In the case of GPS III work, the changes made LMSS comfortable to negotiate a fixed-price contract, expected to be finalized later this year, for future satellites before the first satellite in the fleet is launched.

Military projects of such importance aren’t normally made fixed-price contracts so early, said Michael Friedman, an LMSS spokesman. Typically, the military absorbs all the cost overruns of early satellites, paying to improve the design once the first satellites are in use.